One of the most critical challenges confronting any start-up business, or a small company seeking to grow larger is adequate financing. Start-up companies, especially including those who have potentially valuable intellectual property or innovative or revolutionary business models, frequently are hampered by the lack of capital necessary to “break out” from an initial research and development mode, and move toward production and commercialization of the new product and/or service.
Start-ups have relatively few options for financing “the next step” in business development. Few, but some, manage to “bootstrap” to the next level, i.e., start out small and try to make a profit, and then reinvest any profits. A significant drawback to this approach is that it is difficult to attain enough income to support salaries for the founding employees.
For centuries, traditional banks have been a potential source of capital for small business. However, a variety of legal and practical constraints often prevent traditional banking institutions from being a lender of first resort for a business start-up.
Occasionally, businesses seeking to start-up, or to shift into a higher level of marketing and commercialization turn to “venture capitalists” as sources of capital—especially small companies with potentially valuable, but also potentially risky, intellectual property. “Venture capitalists” are private investors, typically operating in organized firms, who provide venture capital to promising business ventures. Venture capitalists, however, typically invest only where high (e.g., at least 25 percent) annual returns within one to five years are feasible, and often demand 50 percent or more ownership to exercise control over the investee firm to offset perceived high risk. They may, however, also provide to the funded entity some management and industry expertise, and business connections with other firms and venture capitalists. The objective of venture capitalists usually is to bring the business to its initial public offering (IPO) stage, so that they can sell their shareholdings to the public at high profit, and get out.
But there is a perception among many small company founders that venture capitalists may not be the fastest nor fairest way to grow the business. It can take years to get noticed by influential venture capital firms. And once an investment is obtained, the investors may take up to a 90% share of the company, begin giving orders to the founders/inventors, and then eventually force them out of the enterprise entirely.
Start-up companies which unsuccessfully seek funding from venture capitalists, or which prefer to avoid the venture capitalist route, may turn instead to “angel investors.” An angel investor usually is a wealthy former entrepreneur or professional who provides starting or growth capital in promising ventures, and helps also with advice and contacts. Unlike venture capitalists, angel investors usually operate alone (or in very small groups) and play only an indirect role as advisors in the operations of the investee firm. They are deemed to be ‘angels’ in comparison with venture capitalists who are sometimes derogatorily called “vulture capitalists.”
Angel investors are excellent sources of funding for small business start-ups, but even so many start-ups have difficulty attracting angel investor financing. Many of the most desirable angel investors are preoccupied or unavailable as they pursue various interests in a marketplace where the demand for start-up capital substantially exceeds the supply, even for well-qualified potential investees. Since an angel investor must be typically willing to risk a considerable sum on the investment, he/she must be very interested in an early stage company. Further, angel investors must be at least moderately wealthy since each must be an “accredited investor” under the Securities Act of 1933. Moreover, the investee start-up must be prepared to constantly impress an angel investor and stoke his or her interest, for if the angel looses interest in the project, the start-up may lose funding from the angel.
Accordingly, it is difficult to get a startup company to the point of proceeding to an initial public offering (IPO) of stock. Moreover, even if a start-up grows to the point that an IPO is an appropriate next step, Security and Exchange Commission (SEC) reporting requirements are a large, and potentially prohibitively, expensive drain on the start-up.
Significantly, there are a many people of ordinary or relatively modest means who are interested in investing in private start-up companies, including high-tech businesses with tremendous potential, but are prohibited from investing by practical and legal barriers. In particular, for both the small investor and the start-up, the cost of contracts, ownership estimation, and time (e.g., for due diligence endeavors) often do not justify small investments.
It is known to use independent holding companies to permit “small” investors to purchase interests in securities that are already publicly traded. For example, in about 1996 some entrepreneurs managed to buy a few shares of high-priced stock in Berkshire Hathaway, and then formed a holding company. The holding company's intrinsic value was the stock it owned. The holding company then made an IPO, issuing thousands of its own shares (at a relatively affordable price per share). As a result, the average investor could thereby buy an affordably priced stock that was directly correlated to the value of the high-value stock in Berkshire Hathaway.
In certain contexts, a company may take advantage of what is known as an “alternative public offering” process. Two parts comprise an alternative public offering; a reverse merger and a Private Investment of Public Equity (PIPE). In a reverse merger, a previously private company becomes “public” by merging with (or being acquired by) a public company that functions as a legal “shell.” The shell company is a public company that initially typically has no assets or liabilities. Upon the merger of these private and public companies, the combined entity thereafter trades under the previously private company's name, rather than the shell company's name.
Distinguishing an alternative public offering from a reverse merger is the execution of a simultaneous “PIPE” raise. A “PIPE” is characterized by a publicly traded company selling its stock to investors in a privately negotiated transaction. The stock is normally sold at a discount to current market value and investors normally acquire unregistered “restricted” stock. The typical PIPE investor is an institutional investor (e.g., large pensions, mutual funds). PIPEs are usually completed by investment banks who act as a “placement agent” in the transaction. Additional basic information about alternative public offerings is available at, for example, www.wikipedia.com.
Notwithstanding the foregoing financing methodologies, an unmet need remains, e.g., for, both angels and “small” investors to find more effective techniques to lawfully invest in start-up companies. In particular, it is desirable for investors (be they wealthy, “accredited” or otherwise) to more effectively pool their money, for investing in start-up companies. Moreover, it is desirable for start-up companies to the able to more easily access investors. In particular, start-up companies typically spent too much of their time raising money rather than developing their novel product or service. Accordingly, these and other problems in the prior art are addressed in the disclosure as provided herein below.